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forming  a  Partnership 


Modem  American  Law  Lecture 


Blackstone  Institute,  Chicago 


FORMING  A  PARTNEKSHIP 


BY 

T.  J.  MOLL,  Ph.B.,  LL.M. 

Judge  Superior  Court,  Indiana. 


One  of  a  Series  of  Lectures  Especially  Prepared 
for  the  Blackstone  Institute 


BLACKSTONE    INSTITUTE 
CHICAGO 

Copyright,    iaao,    by    Blackstone    Institute 


r 


T.  J.  MOLL 


THEOPHILUS  J.  MOLL 

Judge  Theophilus  J.  Moll,  the  author  of  this 
Lecture,  was  born  at  Evansville,  Indiana,  in  1872. 
Having  completed  the  high  school  course  with  hon- 
ors, he  attended  DePauw  University,  from  which 
he  received  his  bachelor's  degrees  in  philosophy 
and  law.  He  was  appointed  clerk  of  the  Superior 
Court  at  Evansville,  and  after  serving  two  years 
was  awarded  a  scholarship  at  Cornell  University 
and  received  his  master's  degree  in  law.  He  was 
given  a  scholarship  at  Columbia  University,  which 
he  resigned  to  take  up  the  practice  of  law  in  In- 
diana, having  been  admitted  in  1894. 

In  1901  he  was  engaged  as  instructor  in  the  In- 
dianapolis College  of  Law,  became  its  dean  in 
1905,  and  resigned  in  1909  to  found  the  American 
Central  Law  School,  of  which  he  continued  as  dean 
until  its  merger  into  the  Benjamin  Harrison  Law 
School  at  Indianapolis,  of  which  he  was  dean  until 
1919.  He  was  elected  Judge  of  the  Superior  Court 
at  Indianapolis  in  1914. 

He  wrote  the  article  on  "Receivers"  in  Modern 
American  Law,  has  written  several  of  the  lectures 
in  this  series,  is  the  author  of  a  text  on  Independent 
Contractors,  has  contributed  to  the  Standard  Ency- 
clopedia of  Procedure,  American  Leading  Cases, 
Dunham's  Law  of  Insurance,  Elliott  on  Contracts 
and  the  fourth  edition  of  Elliott  on  Corporations. 
He  is  a  member  of  the  Indiana  State  and  Indian- 
apolis Bar  Associations. 


Digitized  by  tine  Internet  Archive 

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http://www.archive.org/details/formingpartnershOOmoll 


FOKMING  A  PAETNERSHIP 

By 
T.  J.  Moll,  Ph.B.,  LL.M. 


INTRODUCTION 

In  discussing  the  organization  of  a  partnership 
it  is  well  to  keep  in  mind  the  distinction  drawn  in 
Modern  American  Law  between  that  relation  and 
those  of  corporations,  joint  ownership  and  the 
like.  Moreover  the  distinction  between  the  legal 
conception  of  a  partnership  and  the  commercial 
view  which  treats  it  as  a  separate  entity  should 
constantly  be  kept  in  mind.  The  discussion  here 
given  is  designed  rather  for  practical  purposes  than 
as  a  technical  treatise,  but  the  reader  of  course  ap- 
prehends that  it  is  an  every-day  application  of  the 
rules  of  law  to  the  ordinary  affairs  of  a  partnership 
and  not  simply  an  exposition  of  what  one  acquires 
in  a  counting  room,  manufacturing  or  mercantile 
establishment.  Men  of  business  realize  more  and 
more  as  time  goes  on  that  a  legal  training  is  a  valu- 
able personal  asset,  and  if  they  have  neither  the 
opportunity,  inclination  nor  ability  to  acquire  such 
ij'aining,  they  count  a  lawyer  a  most  excellent  ally 

5 


6  MODERN  AMERICAN  LAW  LECTURE 

in  preventing  litigation  and  losses,  as  well  as  in  rep- 
resenting them  when  they  are  forced  into  court. 
Many  firms  retain  lawyers  by  the  year  to  look  after 
their  legal  interests.  A  lawyer  is  almost  indispensa- 
ble in  the  winding  up  of  a  firm's  affairs  in  a  volun- 
tary dissolution  or  an  involuntary  receivership  or 
bankruptcy,  and  is  quite  indispensable  in  conducting 
the  affairs  of  a  so-called  surviving  partnership.  In 
the  course  of  this  discussion,  therefore,  we  shall  give 
some  practical  suggestions,  first,  on  how  to  launch  a 
partnership ;  second,  on  how  to  conduct  a  going  con- 
cern; and  lastly,  on  how  to  wind  up  a  partnership. 
A  few  practical  forms  are  given  in  appropriate 
places. 

II 

HOW  TO  LAUNCH  A  PARTNERSHIP 

The  first  consideration  is  to  determine  whether  the 
enterprise  is  really  one  resulting  in  partnership,  or 
in  a  corporation,  a  voluntary  association  (in  those 
states  wherein  this  relation  is  separately  recognized) 
or  a  mere  joint  ownership.  This  finally  is  a  question 
of  intent  on  the  part  of  those  interested,  as  set  out  in 
Modern  American  Law.  In  determining  this,  it 
does  not  ordinarily  make  any  difference  inherently 
whether  the  enterprise  is  a  commercial,  manufactur- 
ing, professional,  transporting,  publishing  or  other 
kind,  so  long  as  it  is  legal  and  the  personp  undertak- 
ing it  are  competent. 

Aside  from  the  business  to  be  carried  on,  there  is 
no  more  important  element  in  a  partnership  than 
its   personnel.     Partnership   is   peculiarly   one    of 


FORMING  A  PARTNERSHIP  7 

strictest  confidence  and  trust,  sometimes  lasting  a 
lifetime  and  often  involving  the  entire  fortunes  of 
a  number  of  associates.  Too  much  care  in  forming 
the  association  cannot  be  exercised.  Being  a  contract 
relation,  it  requires  at  least  two  parties;  in  the  ab- 
sence of  a  statute,  it  may  include  any  number  above 
one.  Where  the  number  interested  is  great  it  is  often 
the  better  business  wisdom  to  incorporate;  for  in- 
stance, in  the  case  of  a  co-operative  store,  a  farmers' 
protective  league,  a  mutual  insurance  undertaking. 
Sometimes,  prospective  partners  are  on  account  of 
their  experience,  resources  or  influence,  considered 
desirable,  whereas  from  a  purely  legal  standpoint 
such  persons  are  not  so  acceptable.  An  infant  may 
have  all  these  qualifications,  but  (except  in  rare 
cases)  he  should  not  be  admitted  as  a  partner,  as  he 
can  set  up  his  minority  as  a  personal  defense  and 
there  is  no  right  of  contribution  against  him  person- 
ally in  case  of  a  deficit.  Persons  of  unsound  mind 
and  alien  enemies  are  naturally  undesirable.  Unless 
the  local  statutes  are  very  liberal,  married  women  are 
generally  held  disqualified  to  be  partners,  particu- 
larly when  their  husbands  are  members  of  the  firm. 
The  tendency  is  in  the  other  direction,  however.  Cor- 
porations quite  generally  may  not  enter  into  a  part- 
nership, directly  or  indirectly,  especially  where  the 
object  is  to  stifle  competition.  Similarly  the  rela- 
tion cannot  exist  between  a  corporation  and  an  indi- 
vidual. In  some  jurisdictions  two  firms  are  per- 
mitted to  join  as  a  third  firm,  but  this  is  not  to  be 
commended,  as  it  is  bound,  sooner  or  later,  to  lead 
to  complications  both  legal  and  practical. 


8  MODERN  AMERICAN  LAW  LECTURE 

DRAFTING  CONTRACT  OF  PARTNERSHIP 

Having  agreed  on  the  personnel  of  the  firm,  the 
next  step  is  to  see  that  the  contract  of  partnership 
conforms  to  the  law,  both  common  and  statutory. 
The  former  decrees  that  all  partnerships  must  have 
in  view  a  legal  object;  the  latter  sometimes  regulates 
businesses,  purely  legal,  such  as  banking,  insurance, 
common  carriers,  etc.  If  a  corporate  form  is  con- 
templated, the  statutory  requirements  must  be  met, 
else  the  result  may  unexpectedly  be  a  partnership. 

While  a  distinct  firm  name  is  not  indispensable, 
still  for  practical  purposes  it  is  highly  useful,  espe- 
cially where  there  are  several  in  the  firm,  or  where 
the  various  members  are  interested  in  other  and  dif- 
ferent enterprises,  or  where  the  firm  is  composed  of 
persons  whose  surnames  are  quite  common  in  the 
community.  Fanciful  or  descriptive  firai  names  are 
often  adopted.  Care  must  be  exercised  not  to  use 
one  which  is  deceptive  or  infringes  on  another  firm's 
established  business  name.  Sometimes  statutes  for- 
bid a  partnership  to  adopt  a  name  suggesting  that  it 
is  a  corporation ;  others  require  registration  in  a  pub- 
lic office  if  anything  other  than  the  true  surnames  of 
the  partners  is  employed  in  the  firm  name ;  penalties 
are  usually  provided  for  infringements,  and  hence 
the  legislative  rules  should  be  strictly  complied  with. 
A  firm  name  once  adopted  should  be  used  on  all 
proper  occasions,  some  instances  of  which  appear  in 
subdivision  III. 

While  generally  speaking,  partners  are  each  equally 
interested  in  and  responsible  for  a  firm's  affairs, 


FORMING  A  PARTNERSHIP  9 

this  is  by  no  means  necessarily  so.  The  members 
may  expressly  contract  to  participate  in  any  propor- 
tions tliey  see  fit,  and  as  between  themselves  this  con- 
tract will  be  enforced.  They  may  even  agree  to  con- 
tribute equally  and  share  the  profits  and  losses  un- 
equally ;  or  vice  versa.  If  the  interests  are  unequal, 
business  safety  dictates  that  it  should  be  specifically 
set  out  in  writing  signed  by  all  interested. 

INTERESTS   OF  MEMBERS 

If  other  than  cash  is  contributed,  the  agreed  value 
thereof  should  be  definitely  understood,  whether  it 
is  real  estate,  personal  property  of  any  nature,  or 
simply  time  and  labor.  No  room  should  be  left  for 
dispute  or  adjustment  as  to  the  basis  or  value  on 
w^hich  it  is  received.  If  one  member  contributes  more 
than  his  agreed  share  of  cash  or  its  equivalent,  the 
terms  and  conditions  on  which  the  firm  receives  and 
accepts  such  excess  should  be  expressly  and  definitely 
understood.  This  applies  not  only  at  the  inception 
but  as  well  during  the  continuance  of  the  firm,  and 
it  is  especially  true  as  to  any  real  estate  contributed 
by  a  member,  and  particularly  as  to  the  interest  of 
such  member's  wife. 

Barring  unforeseen  casualties,  such  as  death  or 
business  failures,  it  is  well  to  agree  that  the  partner- 
ship relation  shall  continue  a  certain  definite  named 
period,  such  as  a  year,  five  years,  ten  years,  or  the 
like ;  or  that  it  shall  be  self-renewing  from  period  to 
period  of  certain  duration,  unless  during  one  such 
period  either  member  shall  indicate  a  desire  to  termi- 
nate the  relation  at  the  end  of  the  current  period. 


10  MODERN  AMERICAN  LAW  LECTURE 

It  is  usual  and  quite  proper,  in  organizing,  to  stip- 
ulate what  course  shall  be  pursued  upon  dissolution, 
voluntary  or  involuntary ;  what  rights  the  remaining 
members  shall  have  to  acquire  the  interest  of  the 
retiring  partner ;  what  voice  each  member  shall  have 
in  admitting  new  members  or  changing  the  scope  of 
the  firm  business;  what  control  the  survivors  shall 
have  in  the  event  one  member  dies.  While  the  pre- 
cise cause  for  a  dissolution  or  other  termination  can- 
not be  foreseen,  it  is  not  amiss  to  provide  a  solution 
in  advance  for  the  more  frequent  contingencies. 

One  of  the  most  important  things  to  provide  for 
in  launching  a  partnership  is  to  specify  what  part 
each  partner  is  to  perform  in  carrying  out  the  con- 
tract, what  his  respective  rights,  duties  and  respon- 
sibilities are  to  be,  how  much  time  and  attention  he 
is  to  devote  to  the  firm's  business,  how  (in  cases  of 
disagreements  between  the  several  members)  dis- 
puted questions  are  to  be  decided,  through  what 
course  and  by  what  procedure  substantial  changes 
in  the  firm's  affairs  are  to  be  made,  how  much  and  in 
what  way  and  at  what  times  each  is  to  contribute  his 
share  to  the  firm's  assets  and  is  to  draw  out  his  share 
of  the  firm's  profits. 

If  the  partnership  contract  or  agreement  is  re- 
duced to  writing  it  is  of  paramount  importance  that 
these  elements  of  the  contract  be  included  and 
be  particularized.  Sometimes,  though  comparatively 
seldom,  the  contract  of  partnership  must  be  in 
writing  under  the  Statute  of  Frauds. 

The  following  is  submitted  as  a  sample  of  Articles 


FORMING  A  PARTNERSHIP  11 

of  Agreement  of  Partnership.  It  is  to  be  modified, 
of  course,  to  suit  varying  circumstances : 

ARTICLES  OF  PARTNERSHIP 

Agreement  made  at  Indianapolis,  Indiana,  this day  of 

,  1916,  by  and  between  A.  B.,  M.  N.,  and  Y.  Z.,  all 

of  said  city,  witnesseth : 

1.  Said  parties  agree  to  become  and  continue  as  partners  in 
the  wholesale  and  retail  grocery  business  at  Indianapolis  (and, 
or,  at  such  other  places  as  may  hereafter  be  mutually  agreed 

upon)  from  the day  of ,  1916,  to  the day 

of   ,  191. .,  and  from  year  to  year  (or  for  similar 

periods)  thereafter  and  until  one  or  more  notify  the  rest  to 
the  contrary  in  writing  during  such  firet  or  any  subsequent 
period. 

2.  The  firm  name  and  style  shall  be  "Capitol  Grocery  Com- 
pany," and  the  same  shall  not  be  changed  except  by  mutual 
consent  and  shall  be  used  for  all  firm  purposes  but  not  otherwise. 

3.  The  capital  of  said  finn  shall  be  $50,000  to  be  contributed 
by  said  partners  as  follows :  by  A.  B.,  $25,000 ;  by  M.  N.,  $15,000, 
and  by  Y.  Z.,  $10,000;  all  to  be  paid  in  cash  on  or  before  the 
agreed  date  for  beginning  business,  except  that  said  A.  B.  may 
assign  to  said  firm  a  certain  99-year  lease  held  by  him  upon 
the  premises  described  as  No.  189  East  Washington  Street, 
Indianapolis,  and  the  same  shall  be  taken  and  accepted  as  $5,000 
of  his  said  contribution.  There  shall  be  no  increase  or  decrease 
in  said  capital  except  by  mutual  consent,  and  as  mutually 
agreed  upon. 

4.  Said  A.  B.  shall  be  entitled  to  receive  interest  at  6  per  cent 
per  annum  upon  the  difference  between  his  contribution  and  the 
next  lower  contribution,  and  the  excess  of  the  profits  above  such 
interest  shall  be  divided  equally. 

5.  All  moneys  received  on  account  of  said  firm  -shall  be  depos- 
ited in  the  firm 's  name  in  the  bank  selected  by  said  firm,  and  no 
expenditure  above  $5.00  shall  be  paid  except  by  check  signed 
by  the  said  firm  by  said  A.  B.;  moneys  for  employes'  weekly 
payrolls  and  for  minor  current  expenses  may  be  drawn  in  lump 
sums  as  needed.  Said  partners  shall  each  be  entitled  to  draw 
monthly  not  to  exceed  $ in  anticipation  of  profits  from 


12  MODERN  AMERICAN  LAW  LECTURE 

said  business ;  together  wdth  such  additional  sums  as  may  be  mu- 
tually agreed  upon  at  the  end  of  each  fiscal  year,  not  exceeding 
in  the  agregate,  however,  ninety  per  cent  of  the  net  profits  for 
such  year. 

6.  Said  M.  N.  and  Y.  Z.  shall  devote  their  whole  time  and 
attention  to  said  finn  business,  and  said  A.  B.  shall  devote  as 
much  time  as  may  be  necessary  properly  to  attend  to  all  and 
singular  the  financial  and  office  affairs  of  said  business.  Said 
M.  N.  shall  supervise  the  internal  affairs  of  said  business  and 
said  Y.  Z.  the  outside  matters,  except  those  delegated  to  A.  B. 
In  case  of  disagreement  as  to  any  delegated  matter,  a  majority 
shall  govern.  Neither  partner  shall  directly  or  indirectly  engage 
in  any  business  competing  with  said  firm,  nor  shall  either  part- 
ner become  surety  for  any  other  person. 

7.  Proper  account  books  shall  be  kept  and  all  partnership 
correspondence,  vouchers  and  documents  shall  be  kept  at  the 
firm's  office,  A  general  account  of  the  firm's  assets  and  liabil- 
ities shall  be  taken  on  the  ....  day  of at  the  end  of 

each  fiscal  year,  to  be  signed  by  all  partners  and  permanently 
kept,  each  retaining  a  copy  and  to  be  binding  on  all  except  for 
error  discovered  within calendar  months  thereafter. 

8.  Upon  dissolution  a  general  account  as  aforesaid  shall  be 
taken,  the  firm  assets  shall  be  sold  and  the  debts  due  the  firm 
collected  as  soon  as  possible  and  the  proceeds  paid  out,  (1)  in 
paying  debts  of  the  firm  due  third  persons,  (2)  in  paying  each 
partner  any  amount  due  him  for  sums  advanced  in  excess  of 
his  agreed  share  of  the  capital,  (3)  in  reimbursing  each  partner 
proportionately  the  actual  capital  by  him  contributed,  (4)  the 
balance,  if  any,  to  be  distributed  equally  after  deducting  any 
interest  still  due  A.  B.,  as  provided  in  item  4  above. 

9.  These  articles  may  be  amended  from  time  to  time  by 
unanimous  consent  in  writing  signed  by  all  the  parties  hereto. 

In  witness  whereof  we  have  hereunto  signed  our  names  this 
. , , ,  day  of ,  1916,  at  Indianapolis,  Indiana,  Exe- 
cuted in  quadruplicate,  each  retaining  a  copy,  the  fourth  to 
be  placed  and  to  remain  in  the  office  of  the  firm. 

(Signed)  A.  B. 
M.  N. 
Y.  Z, 


FORMING  A  PARTNERSHIP  13 

III 
HOW  TO  CONDUCT  A  PARTNERSHIP 

The  fact  that  a  partnership  is  ordinarily  a  busi- 
ness venture  for  anticipated  profits  and  is  a  relation 
of  utmost  confidence  and  one  by  which  each  member 
is  for  firm  purposes  made  both  a  principal  and  an 
agent  for  the  whole  enterprise,  imperatively  necessi- 
tates that  the  affairs  of  the  firm  shall  be  conducted 
in  a  manner  best  suited  to  promote  the  interests  of 
the  partnership. 

The  debts  of  the  firm  should  never  be  permitted 
to  exceed  its  assets.  This  is  particularly  true  at  the 
beginning  of  the  firm's  career  when  its  credit  is  unes- 
tablished.  Hence,  no  business  should  be  begun 
until  the  terms  of  the  partnership  agreement  among 
its  several  constituent  members  as  to  their  respective 
contributions  to  the  firm's  capital,  have  been  fully 
and  religiously  complied  with.  ''A  good  beginning 
is  half  done."  With  the  capital  paid  in,  the  firm 
may  (and  perhaps  must)  incur  obligations  for  the 
firm's  benefit;  it  may  even  incur  immediate  debts; 
but  such  debts  and  obligations  should  be  kept  within 
the  bounds  of  the  assets,  calculated  by  the  property 
secured  by  investing  the  capital  and  incurring  the 
indebtedness. 

A  concern  which  cannot  readily  discover  whether 
it  is  making  or  losing  money,  in  other  words,  a  firm 
which  cannot  easily  determine  whether  its  primary 
purpose  of  securing  profits  is  being  accomplished,  is 
not  being  properly  managed  or  conducted.    Profits 


14  MODERN  AMERICAN  LAW  LECTURE 

are  the  difference  between  the  amount  of  cash  re- 
ceived and  of  expenses  paid  out.  Hence,  although  it 
is  diameterically  contrary  to  the  legal  conception,  the 
firm  in  all  its  dealings  with  third  persons  and  even 
with  its  own  members  as  individuals,  should  be  con- 
sidered and  reckoned  as  a  separate,  distinct  entity. 
All  its  books,  accounts,  records,  publications  and  the 
like,  should  be  opened  and  maintained  in  this  way. 
Any  departure  is  sure  to  lead  to  unforeseen  conse- 
quences and  probable  complications  and  disasters. 

FIRM  ACCOUNTS 

The  firm  should  keep  a  separate,  distinct  account 
with  each  individual  member,  beginning  with  his  con- 
tribution to  the  original  capital,  including  any  in- 
terest paid  him  on  any  excess  he  may  have  con- 
tributed and  including  all  moneys  he  has  drawn  ac- 
cording to  the  agreed  drawing  account,  or  otherwise 
in  violation  of  such  agreement,  and  any  goods  bought 
on  credit  from  the  firm,  and  closing  with  the  amount 
paid  each  such  member  on  final  accounting  and  dis- 
tribution. 

Dealings  between  individual  members  should  not 
be  permitted  to  be  entered  on  the  firm's  books;  these 
entries  should  be  confined  to  but  should  include  every- 
thing pertaining  to  the  firm's  finances. 

The  importance  of  taking  a  complete  account  at 
regular,  stated  times  cannot  be  over-emphasized. 
The  superintendence  of  the  finances  of  a  concern, 
especially  if  it  is  in  any  degree  a  commercial  one, 
should  be  intrusted  to  one  member  upon  whom  would 


FORMING  A  PARTNERSHIP  15 

therefore  rest  the  responsibility  that  goes  with  such 
management.  This  of  course  should  always  be  sub- 
ject to  the  inspection,  approval  or  criticism,  and 
benefit  of  his  associates  and  altogether  for  the  best 
interests  of  the  firm  as  an  entirety. 

Each  member  must  of  course  strive  to  perform 
fully  and  faithfully  his  part  toward  the  general  good, 
keeping  in  mind  the  confidential  nature  of  the  rela- 
tion. Good  faith  towards  each  other  is  as  indis- 
pensable as  due  care  in  conducting  the  business. 
Secret  deals,  private  profits,  surreptitious  competi- 
tion and  such  things  should  be  looked  upon  as  well- 
nigh  criminal.  Each  one  associated  in  a  partnership 
owes  it  to  his  fellows  not  less  than  to  himself  and 
those  dependent  on  him,  to  give  them  the  best  he  can 
in  return  for  which  they  should  and  doubtless  will 
give  him  the  best  they  can.  In  fact  each  is  mutually 
dependent  on  the  others.  A  partnership  is  peculiar 
in  that  a  partner  is  in  every  transaction  involving 
the  firm  and  within  the  scope  of  the  firm  business  at 
once  both  a  principal  and  an  agent.  In  acting  for 
the  firm  he  is  both  acting  for  himself  as  a  member 
thereof,  and  hence  as  a  principal,  and  for  his  asso- 
ciates whom  as  a  firm  he  represents  as  an  agent. 
They  in  turn  each  occupy  the  same  attitude  toward 
him.  In  fact,  it  is  well  for  every  partner  in  every 
transaction  involving  the  entire  partnership  to  con- 
sider himself  as  simply  representing  an  artificial 
being,  the  firm  itself.  He  should  put  his  loyalty  to 
his  firm  foremost.  His  own  instinct  of  self-preser- 
vation may  safely  be  trusted  to  safeguard  any  selfish 
interests. 


16  MODERN  AMERICAN  LAW  LECTURE 

DEALING  WITH  THIRD  PERSONS 

In  representing  the  firm,  he  should  act  with  at 
least  an  equal  degree  of  care,  caution,  diligence  and 
good  faith  that  he  would  exercise  if  the  affair  were 
one  in  which  he  alone  were  involved.  In  the  depart- 
ment or  territory  in  which  he  acts  he  should  keep, 
preserve  and  report  accounts  and  statements  of  all 
matters,  to  a  knowledge  of  which  the  other  members 
are  entitled.  He  should  never  exploit  the  firm  or 
its  resources  without  the  knowledge  of  his  associates 
and  their  willing  consent  first  obtained,  and  even 
then  he  should  never  go  beyond  the  bounds  of  safety 
to  the  creditors  of  the  firm. 

In  the  absence  of  notice  to  the  contrary  given  to 
a  third  person,  each  partner  may  enter  into  contracts 
within  the  scope  of  the  firm's  business  and  on  behalf 
of  the  firm,  so  as  to  bind  the  firm.  He  should  of 
course  confine  his  acts  to  the  authority  conferred. 
And  in  doing  so  he  should  also  be  careful  to  see  that 
he  binds  the  firm  as  such  and  does  not  exempt  the 
firm  and  bind  himself  alone.  All  orders,  commercial 
paper,  written  contracts  and  the  like  should  be  signed 
by  or  addressed  to  the  firm  in  its  accustomed  firm 
name.  Thus,  a  check  should  be  signed:  Capitol 
Grocery  Co.,  per  A.  B. ;  not  A.  B.,  manager  of  Cap- 
itol Grocery  Co.  If  the  firm  is  the  beneficiary  of  the 
obligation,  it  should  be  named  therein  by  its  firm 
name,  and  not  by  the  several  names  of  its  members. 
Thus,  a  promissory  note  should  read:  "Indianap- 
olis, Ind.,  January  10,  1914,  Thirty  (30)  days  after 
date  we  promise  to  pay  to  the  order  of  Capitol  Gro- 


FORMING  A  PARTNERSHIP  17 

eery  Co.,  the  sum,"  etc.  Endorsements  should  be  in 
the  firm  name. 

Sometimes  in  the  more  important,  formal  con- 
tracts it  is  well  to  enumerate  the  several  members  of 
the  firm,  reciting  that  they  are  doing  business  under 
such  and  such  a  firm  name.  Thus  in  a  long  time  lease 
the  expression  would  be  about  as  follows : 

**This  agreement  made  this  10th  day  of  January, 
1916,  by  and  between  R.  S.,  first  party,  hereinafter 
referred  to  as  the  lessor,  and  A.  B.,  M.  N.,  and  Y.  Z., 
partners  doing  business  under  the  firm  name  and 
style  of  Capitol  Grocery  Company,  second  parties, 
hereinafter  referred  to  as  the  lessee,  Witnesseth," 
etc. 

Either  form  is  proper  as  to  bills  of  sale  and  chattel 
mortgages.  But  by  reason  of  the  arbitrary  rules  of 
the  common  law,  deeds  and  mortgages  of  real  estate 
to  and  from  partnerships  must  specify  the  names 
of  the  several  members  of  the  firm  interested  therein, 
and  if  executed  by  the  firm  they  must  be  signed  by 
the  individual  members  and  not  simply  in  the  firm 
name  through  one  of  their  number.  (9  M.A.L.  361.) 
In  a  few  States  the  rule  is  different  and  the  local 
statutes  and  decisions  should  be  consulted  in  such 
jurisdictions.  A  partnership  as  such  does  not  have 
a  seal  as  does  a  corporation. 

DEALINGS  BETWEEN  FIRM  AND  MEMBERS 

From  a  purely  conmiercial  standpoint,  a  contract 
may  be  entered  into  between  a  firm  and  one  or  more 
of  its  separate  members,  naming  the  firm  as  such. 
As  a  legal  proposition  this  is  impossible  at  common 


18  MODERN  AMERICAN  LAW  LECTURE 

law,  but  trade  usages  permit  it  and  it  is  not  illegal; 
it  is  simply  unenforceable  at  law,  although  it  may 
be  the  basis  of  an  equitable  suit.  Such  agreement 
should  describe  the  partnership  by  its  firm  name  as 
one  party,  and  not  specify  the  individual  members, 
as  this  would  lead  to  a  legal  absurdity  in  having  the 
same  person  both  promisor  and  promisee.  A  note, 
for  example,  given  by  one  partner  to  liis  firm  should 
name  the  firm  as  payee.  A  check  drawn  to  one 
partner  should  be  to  that  partner  by  name,  even 
though  he  himself  signs  the  checks  for  the  fii^m,  thus: 
''First  National  Bank.  Pay  to  the  order  of  A.B., 
One  Hundred  Dollars  ($100.00).  Capitol  Grocery 
Co.,  perA.B." 

The  creditor  of  an  individual  partner  avails  him- 
self of  the  firm's  goods  and  especially  of  the  firm's 
commercial  paper  (such  as  notes  and  checks)  in  pay- 
ment of  the  debt  of  such  individual  partner,  at  his 
peril.  Ordinarily  therefore  such  creditor  will  in 
turn  become  a  debtor  to  the  firm  to  the  extent  of  the 
goods,  etc.,  so  obtained  and  will  secure  no  enforce- 
able right  against  the  firm  on  any  note  given  him, 
even  though  signed  in  the  firm  name.  So  too  as  to 
an  uncashed  check  to  his  order  signed  by  the  firm. 
A  different  result  may  follow  and  greater  rights  be 
secured  if  the  check  is  drawn  to  the  order  of  the  indi- 
vidual partner  and  is  then  endorsed  by  him  in  blank 
and  delivered  to  his  creditor,  or  even  if  it  is  endorsed 
to  the  order  of  such  creditor. 

In  compromising  a  disputed  claim,  whether  aris- 
ing out  of  contract  or  springing  from  tort,  it  is  well 


FORMING  A  PARTNERSHIP  19 

to  enumerate  in  the  body  of  the  receipt  or  release 
given  or  taken,  not  only  the  firm  name  of  the  part- 
nership but  the  names  of  its  several  constituents  as 
well.  This  insures  certainty  of  persons  involved  in 
case  the  claim  is  ever  put  in  suit. 

ACTIONS  INVOLVING  FIRMS 

In  nearly  all  the  States,  the  business-world  notion 
of  a  distinct  legal  entity  is  entirely  ignored  in  bring- 
ing suits  in  which  partnerships  are  concerned.  In  a 
common  law  action  in  which  the  firm  is  suing  as 
plaintiff,  the  title  of  the  cause  would  be:  *'A.B., 
M.N.,  and  Y.Z.,  partners  doing  business  under  the 
firm  name  and  style  of  Capitol  Grocery  Company, 
against  R.S."  If  the  firm  is  the  defendant,  the  title 
may  be:  ''R.S.,  against  A.B.,  M.K,  and  Y.Z.,"  the 
body  of  the  complaint  alleging  that  they  are  partners 
doing  business  under  the  firm  name,  etc.,  as  supra, 
or  it  may  be  "R.S.,  against  A.B.,  M.N.,  and  Y.Z., 
partners  doing  business,"  etc.,  as  supra.  Where 
there  are  several  paragraphs  of  the  complaint  the 
latter  form  is  perhaps  the  better.  In  those  cases 
where  partners  are  suing  their  associates,  a  recital 
in  the  caption,  of  the  fact  that  they  are  partners 
doing  business  under  a  given  firm  name,  is  neces- 
sarily omitted;  so  also  where  two  firms  having  one 
or  more  common  members  sue  one  another.  In  a 
very  few  States,  statutes  enact  a  different  rule. 

Judgments  are  rendered  for  or  against  the  several 
members  of  the  firm  and  not  for  or  against  the  fiiTQ 
as  such ;  although  in  those  States  in  which  firms  may 
sue  in  their  firm  name,  judgments  in  their  favor  in 


20  MODERN  AMERICAN  LAW  LECTURE 

such  firm  name  are  of  course  proper.  In  many 
States,  either  by  custom  or  positive  law,  schedules 
for  tax  purposes  are  made  out  and  filed  in  the  name 
of  the  partnership.  This  has  its  advantages,  in  that 
it  enables  the  firm's  taxes  to  be  paid  as  other  ordi- 
nary expenses,  and  in  case  of  delinquencies  it  per- 
mits the  tax  collector  to  identify  and  locate  easily  the 
specific  property  subject  to  levy.  Some  States  per- 
mit mechanics'  liens  to  be  filed  in  the  name  of  the 
filing  firm. 

MODIFYING  PARTNERSHIP  ARTICLES 

All  agreements  between  the  partners  themselves 
which  substantially  change  any  material  item  of  the 
original  articles  of  partnership  should  be  reduced 
to  writing  and  signed  by  each  partner.  Any  stipula- 
tion which  is  out  of  the  ordinary  in  partnership  mat- 
ters should  be  thus  written  and  signed,  as  for  exam- 
ple, that  there  shall  be  an  unequal  sharing  of  profits 
or  losses,  that  one  partner  shall  be  compensated  and 
another  not,  that  one  partner  shall  not  be  expected 
or  required  to  devote  smy  time  to  the  business. 

The  following  outline  will  serve  as  a  guide  in  pre- 
paring a  certificate  of  the  formation  of  a  limited 
partnership : 

State  of  Indiana,  ^  j^^;^ 


County  of  Marion. 

The  undersigned  A.  B.,  M.  N.,  and  U.  Z.  hereby  form  a 
limited  partnership  pursuant  to  the  Indiana  Statutes,  and  for 
such  purpose  certify  as  follows: 

I.  The  firm  name  of  said  limited  partnership  shall  be  Capitol 
Grocery  Company. 


FORMING  A  PARTNERSHIP  21 

II.  The  general  nature  of  the  business  to  be  transacted  is 
the  wholesale  and  retail  dealing  in  groceries. 

III.  The  names,  both  Christian  and  surname,  of  all  the  per 
sons  herein  and  hereto,  and  their  respective  places  of  residence, 
are  as  follows: 

Andrew  Brown,  residence,  Indianapolis,  Indiana. 
Michael  Nolan,  residence,  Indianapolis,  Indiana. 
Ulric  ZAvingle,  residence,  Chicago,  Illinois. 
The  first  two  of  whom  are  general  partners  and  the  third  is 
special  partner  herein. 

IV.  That  the  said  special  partner  has  contributed  to  the  stock 
of  said  partnership  $2,000  in  cash. 

V.  That  said  limited  partnership  shall  continue  from  Janu- 
ary 1,  1916,  to  December  31,  1918,  on  which  latter  date  the 
same  shall  terminate. 

In  witness  whereof  we  have  hereunto  set  our  hands  and  seals 
this  January  1st,  1916. 

Andrew  Brown. 
Michael  Nolan. 
Ulric  Zwingle. 

State  of  Indiana, Iqo 
Marion  County.    J 

On  this  January  1,  1916,  before  me,  a  notary  public  in  and 
for  said  county  and  state,  personally  appeared  the  above  named 
A.  B.,  M.  N.,  and  U.  Z.,  to  me  known  to  be  the  persons  named 
in  the  foregoing  instrument,  and  they  severally  acknowledged 
the  signing  and  executing  thereof  for  the  purposes  therein  set 
forth.    Witness  my  hand  and  notarial  seal. 

My  Commission  Expires  

Lew  Shank, 

Notary  Public  in  and  for  Marion  County,  State  of  Indiana. 

If  during  or  at  the  conclusion  of  an  agreed  period 
of  partnership  the  several  members  conclude  and 
agree  to  continue  their  firm  business  for  another 
determinate  period,  they  may  adopt  a  written  con- 
tract substantially  as  follows  (after  setting  out  the 
preamble)  : — 


22  MODERN  AMERICAN  LAW  LECTURE 

Whereas  said  parties  have   since    ,   191 . . ,   been 

engaged  in  the  wholesale  and  retail  grocery  business  at  Indian- 
apolis, Indiana,  as  the  Capitol  Grocery  Company  (under  written 

articles  of  agreement  executed  by  said  parties  dated , 

191. .),  and  desire  to  continue  said  business  as  herein  set  out; 

It  is  now  mutually  agreed  as  follows : 

I.  Said  business  shall  be  carried  on  in  all  particulars  as 
heretofore  and  be  conducted  as  Capitol  Grocery  Company  (as 
more  fully  appears  from  said  original  articles  of  partnership 
dated ,  191.  .,  and  hereby  made  part  hereof). 

II.  Said  partnership  extension  and  continuation  shall  be  for 

the  full  period  of years  from  the  expiration  of  the  period 

set  out  in  said  original  articles. 

III.  The  original  articles  of  partnership  shall  be  and  they 
are  hereby  modified  in  this  respect  and  not  otherwise : 

(a)  That  each  partner  shall  have  a  drawing  account  of 
dollars  per  month  (or  quarter). 

(b)  That  the  interest  to  be  paid  said  A.  B.,  on  his  excess 
contribution  to  the  capital  of  the  firm  shall  be  reduced  to  five 

per  cent  per  annum  from  and  after  the  ....  day  of , 

191... 

(c)  (Insert  any  other  changes  or  additions.) 

(Sign  and  acknowledge  as  in  the  original  articles.) 

IV 
HOW  TO  TERMINATE  A  PARTNERSHIP 

As  set  out  in  the  text,  Modern  American  Law,  in 
various  places  in  the  article  on  Partnership,  any 
substantial  change  in  the  personnel  of  a  firm  has 
the  legal  effect  of  terminating  the  partnership.  The 
dissolution  may  be  voluntary  or  involuntary,  and  the 
business  may  be  stopped,  suspended  or  continued, 
but  in  either  event  the  legal  effect  upon  the  old  firm 
is  the  same. 

If  the  partners  mutually  agree  to  wind  up  the 
business,  the  process  is  comparatively  simple.    The 


FORMING  A  PARTNERSHIP  23 

partners  jointly  (or  by  certain  of  their  number 
selected  for  that  purpose)  close  out  its  assets,  collect 
its  outstanding  accounts,  pay  off  all  the  firm  credit- 
ors, satisfy  the  valid  claims  of  such  partners  as  have 
contributed  more  than  their  share  of  the  capital  of 
the  firm,  pay  back  to  each  partner  his  share  of  the 
capital  and  divide  up  the  balance  (i.  e.,  the  profits) 
among  the  members  according  to  their  several  inter- 
ests. It  is  usually  assumed  that  neither  of  the  firm 
will  continue  to  trade  in  the  firm  name,  but  it  is 
always  the  safest  course  to  notify  those  with  whom 
the  firm  has  had  dealings  (especially  if  they  have 
given  the  firm  credit)  of  the  fact  of  such  dissolution 
and  discontinuance.  The  public  generally  should 
also  be  notified,  but  this  may  be  done  by  a  newspaper 
or  other  public  notice. 

CHANGING  PERSONNEL  OF  FIRM 

It  may  be  mutually  agreed  to  make  a  change  in  the 
personnel  of  the  firm  either  by  having  one  of  the 
members  withdraw,  leaving  his  associates  to  continue 
the  business,  or  by  admitting  a  new  and  additional 
member,  or  by  combining  the  two  and  substituting  a 
new  member  for  one  who  retires.  In  each  such  case 
the  business  of  the  old  firm  should  be  adjusted,  both 
as  to  the  individual  members  interested  and  as  to  the 
firm  creditors,  at  least  to  such  an  extent  that  the  rela- 
tions of  the  new  firm  to  the  old  one  and  of  the  cred- 
itors of  both  the  old  and  new  firms  to  each  of  the 
firms  respectively,  may  not  be  confused  or  give  rise 
to  any  mistakes,  and  notices  should  be  sent  out  and 
published   accordingly.     Even   though   the   change 


24  MODERN  AMERICAN  LAW  LECTURE 

which  is  made  in  the  personnel  of  the  firm  is  one  that 
was  within  the  contemplation  of  the  parties  at  the 
time  the  contract  of  partnership  was  entered  into, 
it  is  well  to  have  an  express,  written  agreement  be- 
tween the  continuing  members,  on  the  one  hand,  and 
the  outgoing  or  incoming  partners,  or  both,  as  the 
case  may  be,  on  the  other  hand,  as  to  the  precise 
terms  and  conditions  on  which  such  change,  when 
effected,  is  made. 

The  change  may  be  within  the  contemplation  of 
the  parties  and  still  be  involuntary,  as  where  one  of 
the  partners  dies  or  becomes  otherwise  incapacitated. 
In  addition  to  the  course  of  adjustment  and  notice 
as  in  ordinary  cases,  this  situation  involves  require- 
ments frequently  governed  by  state  statutes  as  to 
** surviving  partnerships"  which  must  be  consulted 
and  followed.  To  guard  against  a  possible  question 
of  exclusive  right  in  the  survivor,  or  survivors,  it  is 
well  to  stipulate  that  there  shall  be  no  benefit  of  sur- 
vivorship and  that  the  legal  representative  of  each 
deceased  partner  shall  become  entitled  to  his  share 
as  part  of  the  personal  estate  of  the  decedent  (and 
shall  or  shall  not,  as  may  be  agreed,  have  a  voice 
in  the  management  of  the  business  during  its  wind- 
ing up). 

If  the  partnership  may  by  agreement  be  terminated 
on  notice,  such  notice  may  be  in  substantially  this 
form:     "Pursuant  to  the  articles  of  partnership 

dated ,191. .,  between  A.B.,  M.N.,  and  Y.Z., 

I  hereby  notify  you  that  I  intend  to  terminate  the 
partnership  subsisting  between  us,  on  July  4,  1917. 
(Signed)  M.  K" 


FORMING  A  PARTNERSHIP  25 

The  following  is  a  common  form  of  notice  of  dis- 
solution by  consent:  *' Notice  is  hereby  given  that 
the  partnership  between  the  undersigned  doing  busi- 
ness at  Indianapolis,  Ind.,  as  Capitol  Grocery  Co.,  is 
hereby  dissolved.  Those  owing  the  firm  will  please 
settle  at  once  and  those  to  whom  the  firm  is  indebted 
will  present  their  claims  forthwith.  (To  which  may 
be  added,  to  suit  the  case:)  The  business  in  the 
future  will  be  carried  on  by  said  A.B.  alone  (or  by 
said  A.B.,  Y.Z.,  and  R.S.),  who  will  settle  all  claims 
and  collect  all  accounts.    Signed,  A.B.,  M.N.,  Y.Z." 

SURVIVING  PARTNERS 

Upon  the  death  of  one  partner,  it  becomes  the  duty 
of  the  survivors  to  close  up  the  firm's  affairs.  The 
survivor  is  a  sort  of  trustee  for  the  deceased  mem- 
ber's estate  and  for  the  creditors  of  the  firm.  Such 
survivor  has  the  sole  right  to  the  possession,  control 
and  management  of  the  firm  property  for  closing  up 
the  firm  business.  Until  such  final  settlement,  the 
legal  representatives  of  the  decedent  (in  the  absence 
of  contract)  can  make  no  claim  and  can  take  no 
active  part  in  winding  up  its  affairs.  If  there  are 
several  survivors  they  act  jointly.  At  the  death  of 
the  last  survivor,  the  trust  being  still  unsettled,  its 
further  adjustment  falls  upon  his  legal  representa- 
tive. The  survivor  has  authority  to  do  on  behalf  of 
the  trust  whatever  the  partners  themselves  might 
have  done,  at  least  so  far  as  winding  up  the  business 
is  concerned.  It  is  his  duty  to  pay  the  firm  debts  and 
distribute  the  surplus  as  soon  as  possible,  consist- 
ently with  the  interests  of  all  concerned.    He  must 


26  MODERN  AMERICAN  LAW  LECTURE 

act  in  the  utmost  good  faith  and  with  due  care.  Ordi- 
narily, by  statute,  he  must  file  an  inventory  and  ap- 
praisement, together  with  a  list  of  liabilities;  com- 
monly he  has  to  give  bond.  He  brings  and  defends 
suits  involving  the  partnership  thus  terminated. 
Death  being  one  of  the  risks  incurred,  a  surviving 
partner  settling  the  business  is  often  held  not  entitled 
to  additional  compensation.  If  he  fails  properly  and 
promptly  to  comply  with  the  statutory  requirements, 
a  receiver  may  be  appointed,  who  then  has  all  the 
rights  and  duties  incident  to  any  receivership. 
Where  the  surviving  partner  or  partners  are  incom- 
petent to  carry  on  the  business  for  any  reason,  as  for 
example  infancy,  coverture,  alienage,  mental  un- 
soundness, etc.,  it  is  probable  a  receiver  would  be  ap- 
pointed in  the  first  instance  upon  a  proper  appli- 
cation and  showing. 


\ija\j lord  "====■ 

GAYlAMOUNm"" 
PAMPHLET  BINDER 

^^^       Syracuse,  N.Y.    , 
Z^S       Stockton,  Calif.  ' 


UC  SOUTHERN  REGIONAL  LIBRARY  FACILITY 


I 


